Relaxed Standards Allow Credit Unions to Add Services
by Sarah Brouillard
Banks aren’t the only option anymore for small businesses looking to open a savings account or get a loan.
Due to a growing demand by their members and a loosening of standards by the federal government, credit unions are rolling out new business services to tap into the small-business niche.
“We’ve found there is a real market out there for the small-business borrower,” says Bill Raker, president and CEO of US Federal Credit Union in Burnsville.
Small businesses are attracted to credit unions’ bargain rates and lower prices for products and services. Unlike banks, credit unions are owned and controlled by their members, and are not-for-profit.
The Teacher Federal Credit Union of Minnesota in Golden Valley, for example, launched a suite of business services in January 2004. It includes business checking accounts, Visa check cards, business vehicle and equipment loans and Small Business Administration loans. The US Federal Credit Union developed a similar menu for business clients last year. City-County Federal Credit Union in Brooklyn Center has offered commercial services since May 2001. Business services are available only to credit union members.
These credit unions’ business customers typically are the smallest of the small businesses: sole proprietorships, limited liability corporations, and companies with a handful of employees. The types of businesses they attract run the gamut, from accounting firms and photography firms, to real estate companies.
“We’ve been pleasantly surprised” with the results, says Carol McDonough, manager of business services at the 44,662-member Teacher Federal Credit Union, which had opened about 30 business accounts by May 2004. Most business clients are spouses of teachers, who are the credit union’s main membership group.
Right now, business owners are the only ones in their companies who can access the Teacher Federal Credit Union’s services, both on the business and personal banking sides. But their employees might soon get the green light as well, says McDonough. Most commercial clients have about two employees, but some have as many as 20, she says.
McDonough says many clients appreciate such “one-stop shopping,” and are looking for alternatives to the “corporate structure” of big banks. They appreciate the personal relationships and close attention offered by credit unions, she says.
City-County Federal Credit Union’s business services, such as telephone banking and online banking, rival those of traditional community banks. Most of its business loans are for commercial real estate.
Long history
Credit unions have long played a role with small businesses. In fact, the goal of the original credit union movement, which began in Germany in the mid-1800s, was to help skilled workers borrow money for business purposes, says Dean Nelson, CEO of City-County Federal Credit Union, which has 48,144 total members.
But in recent years, credit unions have become more consumer-driven financial institutions. Most credit unions are equipped to set up accounts and conduct business just with individuals, just for personal finances. Rules set by the federal government didn’t allow them to work readily with small businesses and other commercial clients.
Over the last 10 years, those rules have been relaxed, says Roger Johnson, assistant vice president of commercial products at City-County Federal Credit Union.
In September 2003, the National Credit Union Administration (NCUA), the federal agency that charters and supervises federal credit unions, loosened its regulations pertaining to member business loans. It also adopted a new rule to give credit unions more flexibility to manage their assets and make more business loans to both members and non-members.
In the past, credit unions had to limit their member business lending activity to 12.25 percent of their assets. For a number of credit unions, it did not take many loans before they reached that limitation; many felt it was simply not worthwhile to develop or acquire member-business lending expertise necessary to make member-business loans.
Now, under the amended regulations, credit unions are able to apply for waivers for some types of loans, thereby allowing them to exceed the 12.25 percent legal limit.
The regulations were largely criticized by the American Bankers Association. They felt that credit unions now had an unfair competitive advantage (exacerbated by the fact that credit unions don’t have to pay income taxes) and could take away some of their business.
The Independent Community Bankers of America, too, of Washington, D.C., is pushing for change. “Credit unions should stick to their statutory mission,” Paul McGuire of the ICBA writes in a letter to the editor of a local newspaper. “If the large, multi-group and geographic-based credit unions want to operate like commercial banks, they should be subject to the same rules and regulations as commercial banks — including taxation.”
Meanwhile, small businesses are more likely to find business-oriented products and services at the larger credit unions, since they can afford to make the bigger loans. They also tend to have the expertise for assessing risk, and the resources for processing applications.
The playing field soon may be leveled for local smaller credit unions, says Johnson. A credit union service organization (CUSO), due to open in New Brighton within the next six months to a year, will provide the necessary expertise and resources to credit unions who need help processing commercial loan applications and approving loans, says Johnson.
It’s an “organization that helps credit unions do the things they can’t do on their own,” he says.
Something in common
Besides commercial loans, credit unions can serve small businesses in other ways.
Some credit unions offer membership to businesses and their employees, who then use the credit union for their own personal banking as a kind of free company benefit. These companies are called select employee groups.
Credit unions may be picky about what companies they allow in. They may base their decision on how closely a potential select employee group fits their charter and field of membership — both of which can be pretty exclusive. Most credit unions serve groups that share something in common, such as where they work, live or go to church.
Membership at Retail Employees Credit Union in St. Louis Park, for example, comprises exclusively grocery and retail employee groups, including such companies as American Display Inc., Bailey Nurseries, SimonDelivers and Supervalu.
Some credit unions cater to just one select employee group: Honeywell Federal Credit Union in St. Louis Park only allows employees and retirees, and their family members, of Honeywell and its subsidiaries to become members.
Other credit unions’ fields of membership are based on geography, but still allow some select employee groups. Columbia Heights-based First Community Credit Union’s primary membership group is anyone who lives or works in Columbia Heights, Minneapolis, Fridley, Coon Rapids and a handful of other Twin Cities suburbs, yet the credit union also allows a number of government and private select-employee groups.
Others don’t have any select employee groups.
Small employers that are interested in becoming a select employee group should find the closest credit union, and simply ask to join, says Kyle Markland, CEO of Affinity Plus Federal Credit Union in St. Paul. After completion of some back-office paperwork, that credit union may amend its charter to allow entry to the interested company. “It’s a pretty quick process,” he says, usually lasting less than a week.
[contact] Roger Johnson, City-County Federal Credit Union: 763.549.6000; www.ccfcu.org. Kyle Markland, Affinity Plus Federal Credit Union: 651.291.3700; www.affinityplus.org. Carol McDonough, Teacher Federal Credit Union: 763.544.1517; www.tfcumn.org. Dean Nelson, City-County Federal Credit Union: 763.549.6000; www.ccfcu.org. Bill Raker, US Federal Credit Union: 952.736.5000; www.usfed.org.
